New CEPR Project highlights cycle of excessive pay for CEOs and directors

Washington, D.C.- When a new director joins a corporation’s board, there is often a big public display. Official press releases tout the new director’s achievements in politics, academia, or business and note how much the new director’s input and vision will help shape the company’s growth strategy and future success. Once the fanfare fades, however, the director’s track record is typically out of the public eye. The public seldom hears about compensation directors receive, their connection to the company’s performance, and the extent to which they serve shareholders by containing CEO pay. Director Watch, a new project from the Center for Economic and Policy Research (CEPR), changes that by shedding light on the performance of the companies that directors help oversee and the paychecks they and their CEOs collect.

Director Watch provides a much needed public service by compiling profiles of Fortune 100 directors. “The profiles are a compilation of total board compensation for the directors themselves, the compensation of the CEO’s whose pay they help determine, and the stock performance of the companies at which they are board members, information that you rarely see in one place at one time,” said Dean Baker, a co-founder of CEPR. "The profiles will be searchable by name or company, allowing users to assess the performance of directors who serve on multiple boards."

Corporate directors are chosen for their accomplishments and business savvy. Their status brings prestige to a company. Their role is a crucial one in helping to choose and decide the pay of CEOs and other top executives, thus helping to ensure the company’s success. The directors in turn are well compensated for their input.

It might be reasonable for an extraordinary CEO who turns around a failing company to receive tens of millions of dollars in compensation. But this level of compensation is often given to CEOs at companies with only a mediocre or poor performance. This happens in large part because board members often owe their positions to the CEO. This sets up a vicious cycle of excessive CEO compensation – often several hundred times the size of their typical employee’s paycheck-- and a director receiving a paycheck well into the hundreds of thousands of dollars for attending a few meetings a year.

This isn’t just a case of CEOs growing richer at the expense of their stockholders. When CEOs can get tens or sometimes even hundreds of millions of dollars a year in compensation, it affects pay scales everywhere. The result is that the heads of universities, non-profits, and even charities demand larger salaries, often pointing out how much they could earn in the private sector.

Public pension funds, too, are affected. Since they together hold $2 trillion in corporate stock, outsized compensation is money that is not going into these pension funds. The same is true of private pensions, which hold $1 trillion in corporate stocks. 401(k) plans are also largely invested in stocks, meaning that excessive CEO pay takes away from the retirement income of millions of working Americans.

The role of the board of directors in this cannot be overstated. It is the directors’ obligation to hold down CEO pay. They should constantly ask themselves if they could find a top executive who would perform the same job for less money. Just as CEOs look all over the world for the lowest cost workers, corporate directors should be combing the globe for lower paid CEOs. There is nowhere else in the world where top executives get the sort of compensation they receive in the United States. Yet, the rest of the world is full of major corporations that perform as good or better than U.S. corporations by any measure. Directors are supposed to act in the interest of shareholders, not mindlessly hand over the company’s profits to marginally competent or incompetent CEOs.

Unfortunately, this is not happening. But highlighting director and CEO compensation as well as company performance over time could help change that. Director Watch, along with its sister project, The Huffington Post’s Pay Pals, do just that by pulling back the curtain on Board Director and CEO compensation, giving the public a much needed and deserved look at a buddy system that effectively victimizes shareholders and working people alike.